When it comes to your company’s financial security, it pays to focus on your payroll systems. At many businesses, payroll can easily add up to a third of the company’s costs. If your payroll calculations are inaccurate, it can lead to incorrect tax withholding, fines, and interest. By conducting payroll tax reconciliation throughout the year, you can ensure you are withholding the right amount and avoid costly penalties.

Why Your Payroll Tax Reconciliation Should Be a Year-Round Effort

Whether you’re a multinational corporation or a local brand, your best defense against expensive audits, penalties, and errors is year-round payroll tax reconciliation. Through regular payroll tax reconciliation, you can enjoy a few key benefits.

• Ensure You’re Paying the Right Amount in Taxes: Through frequent reconciliation, you can make sure your company is paying and withholding the right amount in taxes.
• Make Deposits on Time: Your organization needs to be fully confident that it is making all of its tax deposits accurately and on time.
• Avoid Penalties: If you don’t submit payroll taxes on time, you may end up with Trust Fund Recovery Penalties (TFRP), failure-to-file penalties, late deposit penalties, and interest. 
• Maintain Legal Compliance: In addition to facing financial penalties, your company could even face criminal charges if it doesn’t comply with payroll tax requirements.
• Detect Fraudulent Activities: Through meticulous payroll tax reconciliation, you can detect and stop fraudulent activities, such as ghost employees, timesheet fraud, and unauthorized payments.
• Catch Tax Deduction Errors: According to one survey, payroll accuracy hovers around 78%, so around one out of five payrolls have errors. Unfortunately, it can also take multiple payroll cycles to remedy errors. As an employer, proper payroll tax reconciliation can help you find and fix errors quickly.
• Implement Changes in Tax Rates and Thresholds: When tax rates and thresholds change, your reconciliation process can ensure these adjustments are implemented properly.
• Streamline Your Financial Reporting: With reconciliation, you can improve your data accuracy and make your financial reporting as easy as possible. This can reduce the amount of time it takes to carry out quarterly and annual tax obligations.

What Are Some Potential Reasons Why Tax Reconciliation Happens? 

Even if you have the best payroll department and highly trained employees, mistakes can happen. Comprehensive tax reconciliation is necessary for a few key reasons.

• FUTA Credit Reduction States: If you’re operating in a FUTA credit reduction state, you’ll likely have a higher tax on Form 940. The debit will generally occur at the end of the year.
• Changes to State Unemployment Rates: When your State Unemployment Insurance (SUI) rate changes its rate during the quarter, there will generally be a debit at the end of the quarter to adjust for the difference.
• Location Changes: If your organization’s or employee’s address changes, this can impact the federal and state taxes you are charged.
• Exemption Modifications: Any adjustment to exemptions can change the tax amount you have to pay.
• Benefits Adjustments: If the amount of benefits changes, it can impact how much has to be withheld in taxes.

How Often Should You Be Performing Payroll Tax Reconciliation?

Ideally, you should reconcile your payroll taxes at multiple points throughout the year. Besides reconciling them before your annual W-2s and quarterly Form 941 filings, you should also reconcile payroll taxes after each pay period and prior to your monthly tax deposits.

Best Payroll Tax Reconciliation Practices for Preventing Last-Minute Scrambles and Audit Risks

To avoid potential penalties and audits, there are a few important payroll tax reconciliation steps that you should follow. If you are uncertain about the best way to reconcile your payroll taxes, reach out to one of Asure’s payroll tax experts for professional guidance and support.

1. Create a Regular Reconciliation Schedule 

Business owners should start by creating a consistent reconciliation schedule. Two days before payday, your payroll department should reconcile paychecks to make sure total hours, overtime, wages, deductions, and contributions are accurate. This type of schedule ensures you catch mistakes before processing pay, making them easier to fix.

Before you submit IRS Form 941 each quarter, you should schedule reconciliation to ensure your withholdings and payments match your payroll records. Similarly, you should schedule reconciliation before filing your annual return. By making a consistent reconciliation schedule, you make checking and fixing mistakes automatic for your team members.

2. Collect Your Bank Statements and Payroll Records

For proper payroll reconciliation, you need to gather all of your bank statements and payroll records. Start by comparing your payroll register to your timecard sheets and verifying information. Then, cross-check the payroll entries in your general ledger with your payroll register. You should also use your company’s bank statements to make sure all of your payroll disbursements are in alignment.

3. Double-Check Payroll Details

Each employee’s information should be accurately recorded in the payroll register and your payroll system. You should analyze the hours worked, pay dates, and deductions. If you recently gave an employee a raise or promotion, make sure this information is reflected in your payroll system. Additionally, double-check the classification of your employees and independent contractors to ensure they are clearly differentiated and classified appropriately. 

4. Calculate Total Wages

Next, calculate the total gross wages for your employees. Bonuses, commission payments, and overtime hours must be figured into this equation for each worker. This information should match the amounts in your general ledger journal entries.

5. Compare to Your Tax Reports

Once you have determined the amount of gross pay for your employees, you should compare it to your payroll register.

Make sure to check that: 

• The gross wages are posted to the right expense reports.
• Liabilities are posted to the appropriate liability accounts.
• Employer taxes get posted correctly as expenses.
• Net pay comes from your cash account.

6. Verify Tax Payment Accuracy

To avoid penalties, you also need to perform tax payment reconciliation. During this process, you need to make sure your federal tax payments through EFTPS match the liabilities on your Form 941. Similarly, state tax deposits should correspond to your state forms. Then, use your quarterly reports to double-check the accuracy of your unemployment tax payments.

7. Investigate Errors and Discrepancies

It’s normal to find errors during the reconciliation process. When this happens, you need a standardized process for documenting and dealing with each error.

• Start by noting the discrepancy.
• Calculate the correct amount.
• Make adjustments to your payroll system and your company’s general ledger.
• Find out if the issue extends to previous pay periods as well.
• Create procedures for preventing and spotting similar errors in the future.

8. Correct Your Records

When you notice payroll errors, it’s important to correct them. You should also create procedures for clearly communicating mistakes with your workers. In general, this communication process should involve reaching out to the affected employees, informing them about the problem, and telling them how you will be fixing the issue. Workers need their paychecks to survive, which is why you must deal with payroll issues using the most transparency and empathy possible.

9. Investigate and Fix Frequent Errors in Your Payroll Tax Systems

If you notice that a certain kind of error keeps occurring, you need to investigate its root cause. Be proactive about identifying and remedying problems, so you can experience fewer issues in the future.

Equally important, you must create a standardized process for documenting payroll procedures, payroll tax reconciliation, and errors. Besides helping you spot common mistakes, good documentation is key for preventing payroll fraud. Eventually, you also may require this documentation for future audits.

10. Train Your Workers

Payroll accuracy requires accurate timekeeping from your general workforce. Train your workers on how to appropriately clock in for work, take breaks, and approve their timesheets. You should also take time to train your payroll department on payroll reconciliation and error prevention.

Improve Your Payroll Tax Reconciliation

Through year-round payroll reconciliation practices, you can avoid the consequences of payroll tax errors. Additionally, consistent reconciliation can improve your compliance rate and prevent payroll fraud from taking place. With the right checks and balances, you can avoid costly penalties and ensure your company is making its deposits on time. 

For help with your year-round payroll tax reconciliation, reach out to our payroll tax experts today.